BNP Paribas Favors Emerging-Market Local Debt on Fed

BNP Paribas Investment Partners is favoring developing-nation local-currency bonds, betting they will be more resilient than dollar notes to any reduction in the Federal Reserve’s $85 billion of monthly debt purchases.

“Hard-currency emerging-market sovereigns are more likely to be more volatile to a reduction in quantitative easing programs in the U.S.,” said Michael Victoros, a London-based investment specialist at BNP Paribas Investment Partners, the asset management unit of France’s largest bank that oversees $648 billion. “We’re promoting very strongly this year emerging-market local currencies and emerging-market hard-currency corporate bonds,” he said in an interview in Singapore.

The yield premium offered by developing nations’ dollar debt over Treasuries has declined 105 basis points in the 12 months through yesterday to 306 basis points, according to a JPMorgan Chase & Co index. The spread for emerging-market local-currency notes was 445 basis points, Victoros said.

Twenty-two of 24 developing-nation currencies tracked by Bloomberg have fallen this month as Fed Chairman Ben S. Bernanke said the monetary authority would reduce its bond buying, which has increased the flow of funds to emerging markets, if there was a sustained improvement in the U.S. economy. This weakening is likely to be temporary, according to Victoros.

“A lot of emerging-market currencies are very far from their purchasing power parity,” he said. “We expect a 5 percent return this year from currency appreciation.”

Corporate Bonds

Local-currency notes in emerging markets lost 4.4 percent this month, set for the worst drop in a year, according to JPMorgan’s GBI-EM Global Diversified Index. Developing economies will expand 5.3 percent in 2013, compared with 1.2 percent growth in advanced nations, according to forecasts by the International Monetary Fund released on April 16.

“The long-term case for emerging markets is very strong,” Victoros said. “What has changed is the client base, where before we used to have hedge funds and mutual-fund clients, now we’re seeing much more sovereign-wealth funds and pension funds.”

Developing nations’ dollar-denominated corporate bonds are also poised to gain as their economies grow, Victoros said. The company prefers bonds of Turkish financial firms, Brazilian agricultural producers and Russian oil companies, he said.

“We believe that emerging-market corporates will make a larger portion of the top 100 firms as we move over the next 10 years,” Victoros said. “Because as their economies grow these corporates have the first-base advantage.”

(Corrects amount of Federal Reserve debt purchases in 1st paragraph in story published May 30.)
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